Japan Slowdown Flashes Warning to Abe as Reforms Await

By Chikako Mogi -
Nov 14, 2013

Japanese companies eased off on capital-spending growth in the third quarter and failed to step up exports even with a cheaper yen, contributing to an economic slowdown that puts pressure on Prime Minister Shinzo Abe.

Gross domestic product rose at an annualized 1.9 percent, down from 3.8 percent the previous quarter, with the gain relying on government spending and an accumulation of inventories, the Cabinet Office reported in Tokyo. A widening trade gap lopped off 1.8 percentage point from growth. Corporate investment increased 0.7 percent, down from 4.4 percent.

Abe’s 11-month old administration has sought to re-energize Japan Inc. after years of deflation and population declines reduced manufacturers’ incentive to expand at home. Today’s figures show companies have yet to respond in force, signaling bolder steps may be needed to cut regulation and give companies an incentive to deploy near-record stockpiles of cash.

“Warning lights are flashing for Abenomics,” said Kiichi Murashima, chief economist at Citigroup Inc. in Tokyo. “With the absence of further weakening in the yen and a clear global recovery, Japan’s recovery is losing momentum.”

Officials haven’t demonstrated concern. Economy Minister Akira Amari today said he expects a moderate pace of consumption growth ahead and a solid export recovery. The Cabinet Office this week attributed a slide in consumer confidence to worries about typhoons and the U.S. fiscal impasse, rather than the domestic economy. Bank of Japan Governor Haruhiko Kuroda Nov. 5 said the country remains on pace to achieve his 2 percent inflation goal.

Highest Value

The report showed real GDP on a seasonally adjusted basis growing to 530.1 trillion yen ($5.3 trillion), the highest in comparable data going back to 2001.

Consumer spending contributed 0.1 percentage point to growth last quarter and business investment 0.2 point. Separate data today showed a downward revision of industrial production in September to a 1.3 percent rise from the previous month, compared with a preliminary reading of 1.5 percent.

The Topix index of stocks rose 1.2 percent today in Tokyo, as the yen weakened after Finance Minister Taro Aso said it is necessary to have currency intervention as a policy option. The benchmark gauge has advanced about 50 percent since Abe swept to power in December. The index hovered between 1,100 and 1,200 for much of the July-September period.

The yen was trading 0.5 percent lower at 99.73 against the dollar as of 4:28 p.m.

Persuading Investors

The Nikkei 225 Stock Average could fall about 20 percent to 12,000 if the government doesn’t do more to persuade investors its economic stimulus efforts will succeed, said Norikazu Akedo, Nomura Holdings Inc.’s head of Japan equities. The index was at 14,852.29 at 2:55 p.m.

“Worldwide investors are breathlessly watching the future of Japan,” said Akedo, who oversees equity sales and trading at the nation’s largest brokerage, in a Nov. 12 interview. “We want the government to send out strong messages to foreign and local investors.”

Even with a weakened yen, export volumes are down, a trade index indicates. September’s volume was 1.8 percent lower than a year earlier after a 20 percent slide in the currency against the dollar.

Growth Rebound

Positive signs in the economy include Japan’s largest manufacturer, Toyota Motor Corp., this month raising its full-year net income forecast by 13 percent. Economic growth may rebound this quarter and in the first three months of next year as consumers splurge ahead of a sales-tax bump in April.

At the same time, the latest survey of confidence showed rising concern about the cost of living. Today’s report showed the GDP deflator, a broad measure of prices across the economy, fell 0.3 percent, compared with a forecast slide of 0.5 percent.

Naohiko Baba, chief Japan economist at Goldman Sachs Group Inc., said this week that the effects of the tax increase will produce wilder swings in consumption, and deepening uncertainty over export trends point to volatility in GDP readings to come.

“You really want a regime shift” to convince people deflation is over, Princeton University professor Paul Krugman said in a Bloomberg TV interview from an event in Hong Kong. “To make that shift you want policy where all cylinders are firing, everything is pushing in the same direction and instead you have one important policy -- the consumption tax -- pulling in the opposite direction.”

Nobel Laureates

Speaking at the same event, Columbia University professor Joseph Stiglitz said that while Abenomics got his vote “in terms of concept, 50,000 feet level,” the implementation of the growth strategy would determine its success.

Export growth slowed in September as the nation extended a record run of trade deficits, while imports climbed 16.5 percent, according to separate Finance Ministry figures. Growth in shipments to all major regions declined, with the weakness concentrated in exports to Asia.

“Exports have failed to grow in volume despite expectations they would rise with a time lag following a weakening yen, suggesting there may be a structural problem hurting exporters’ competitiveness and exporting capability,” Baba said.

Masking Concerns

Kyohei Morita, chief Japan economist at Barclays Plc. in Tokyo, said exports should pick up as the global economy improves, although this may mask concerns at home. “The weakness in capital spending shows there is no real domestic strength,” he said.

The economy’s deceleration accompanied a waning of Japan’s stock-market rally and the yen’s depreciation, as the initial effect of Abe’s injection of monetary and fiscal stimulus diminished.

Abe is pushing to pass a set of bills in the current parliamentary session, ending Dec. 6, including tax incentives to encourage corporate investment and the establishment of strategic economic zones that will enjoy reduced business regulation.

Difficult Choices

Bruce Kasman, JPMorgan Chase & Co.’s chief economist, says that the pace of growth shouldn’t be the prime criterion for judging Japan and that investors will instead increasingly focus on whether structural reforms are proceeding.

“Japan’s choices are so bad and difficult” that if the nation can maintain some level of growth over the next decade and also make progress in easing its fiscal burden and altering the structure of the economy, government policies will have been successful, Kasman said at a Nov. 8 forum in Hong Kong.

The government is targeting 3 percent nominal GDP growth and a 2 percent expansion in real terms, on average, over the next 10 years -- rates that Kasman said would be “remarkable.”

Around the world today, South Korea’s central bank left interest rates on hold, while GDP data in Europe showed German growth slowing, and a contraction in the French economy. Growth figures are due from Italy and the euro area, the U.K. reports retail sales and the U.S. gives numbers for the trade balance and initial jobless claims.